Market Forecast For the Week of August 28, 2023: Markets Await Xi’s Decision As He Contemplates A Waterfall

FORECAST: The S&P 500 falls further to 4300 as the jigsaw puzzle that is the global financial markets points to restrictive interest rates and worsening Chinese economics. High valuations in US equities haven’t adjusted to this pessimistic combination and consequently the correction continues to the next support level. What happens after depends on US economic data and Xi Jinping’s ability to set aside a lifelong marxist mindset and grasp the nature of the global economy. If he fails to turn China around as last night’s waterfall action in the Shanghai Composite presages, the global economy will likely be stuck in a low growth mode that calls for lower equity valuations.

I see China reacting to yesterday’s disappointing market reaction by stimulating more urgently and coherently. That would likely coincide with the S&P bottoming out at 4300. From there it would back and fill in the hopes of wending its way back to new highs. If economic data show both continued strength but also more labor elasticity to support the disinflation trend then the S&P has a good chance of retesting 4600 on the belief that earnings can grow in a high interest rate environment. Any resurgence of inflation combined with economic slowing would result in market stagnation. And in all cases the markets are likely to be jolted by earnings that fail to match high hopes as the Fed keeps rates higher for longer, setting up an eventual move back to the October lows.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.